1. Partnerships: Termination and Limited Partnerships
Chapter 37
Partnerships: Termination and Limited Partnerships
Chapter 37: Partnerships: Termination and Limited Partnerships
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2. Exhibit 37-1: The Life Cycle of a Partnership
Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel
Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement
Dissolution—Partnership dissolves either by act of court, act of partners, or operation of law
Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets, and take inventory
Termination or Continuation—Partnership terminates, or continues by creation of continuation agreement
The life cycle of a partnership consists of several distinct stages. In the formation stage, the partnership is formed either by a written agreement, the articles of partnership, or the partnership is created by estoppel. In the performance stage, business is conducted as the partners work for the benefit of the partnership, in accordance with the partnership agreement. In the dissolution stage, the partnership dissolves either by an act of the court, an act of the partners, or through operation of law. In the winding up stage, the partners complete any unfinished partnership business, collect and pay debts, collect partnership assets, and take inventory. Finally, in the termination or continuation stage, the partnership either terminates, or continues through the creation of a continuation agreement.

3. Partnership Termination
Begins when partnership dissolves
Once partnership dissolved and assets liquidated and distributed (“winding up”), partnership terminated
Partnership termination begins when the partnership is dissolved. Once the partnership is dissolved, and partnership assets are liquidated and distributed (known as the “winding up” phase,) the partnership is terminated.

4. Partnership Dissolution
Definition: Partnership cessation
Partnership dissolution can result from:
Partner actions
Operation of law
Court action
Partnership dissolution represents a cessation of the partnership. Partnership dissolution can result from partner actions, through operation of law, and by way of court action.

5. Events Resulting in Partnership Dissolution
Fulfillment of established (agreed-upon) partnership objective
Expiration of term stated in partnership agreement
Partner withdraws from “partnership at will” (partnership that does not specify objective/duration of partnership)
Partner withdraws in accordance with partnership agreement
Partner expelled from partnership in accordance with partnership agreement
Events resulting in partnership dissolution include fulfillment of the agreed-upon partnership objective; expiration of a term stated in the partnership agreement; when a partner withdraws from a “partnership at will,” a partnership that does not specify the objective or duration of the partnership; when a partner withdraws in accordance with the partnership agreement; and when the partner is expelled from the partnership in accordance with the partnership agreement.

6. Examples of Partnership Dissolution By “Operation of Law”
Partner dies
Partner adjudicated bankrupt
Partnership engages in illegal activity
Whenever a partner dies, a partner is adjudicated bankrupt, or when a partnership engages in illegal activity, the partnership is dissolved by “operation of law.”

7. Examples of Partnership Dissolution By “Court Action”
Partner adjudicated insane
Impractical to continue partnership business
Partner incapable of fulfilling his/her duties established by partnership agreement
Partner disagreement as to how to conduct partnership business
A partnership can be dissolved by court action whenever a partner is adjudicated insane, if it is impractical to continue the partnership business, if a partner is incapable of fulfilling his or her duties established by the partnership agreement, and if there is a partner disagreement as to how to conduct the partnership business.

8. “Winding Up” of Partnership (Definition):
Activity of completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventory
“Winding up” of a partnership involves completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventory.

9. Order of Distribution of Partnership Assets (Upon “Winding Up”)
Payment to partnership creditors
Payment of refunds/loans to partners for loans made to partnership
Payment of partners for invested capital
Payment of profits distributed to partners per terms of partnership agreement
In “winding up,” partnership assets are distributed in the following descending order of priority: Payment to partnership creditors, payment of refunds or loans to partners for loans made to the partnership; payment of partners for invested capital; and payment of profits distributed to partners, consistent with the terms of the partnership agreement.

10. Limited Partnership
Definition: Agreement between at least one general partner and at least one limited partner
Allows investor (limited partner) to share in profits of partnership
Limited partner’s liability limited to amount he/she invests in business
A limited partnership is an agreement between at least one general partner and at least one limited partner. The limited partnership form of business organization allows an investor, known as the “limited partner,” to share in the profits of the partnership, while enjoying liability limited to the amount he or she invests in the business.

11. Requirements for Limited Liability (of Limited Partner)
Limited partner has complied in good faith with certificate of limited partnership filing requirement
Limited partner does not participate in control of business
Limited partner’s surname is not part of partnership name
In order for a limited partner to enjoy limited liability, the limited partner must comply in good faith with the certificate of limited partnership filing requirement, must not participate in the control of the business, and must not have his or her surname included as part of the partnership name.

12. Comparison of General Partners and Limited Partners
Has all rights associated with controlling business
Has unlimited personal liability for all partnership debts
Acts as agent of partnership
Limited Partner:
Has no right to participate in management and control of business
Liability limited to amount of capital partner has contributed to business
Is not an agent of the partnership
A general partner has all rights associated with controlling the business, has unlimited personal liability for all partnership debts, and acts as an agent of the partnership. A limited partner has no right to participate in the management and control of the business, has liability limited to the amount of capital the limited partner has contributed to the business, and is not an agent of the partnership.

13. Reasons For Dissolution of Limited Partnership
Expiration of term established in certificate of limited partnership
Completion of objective established in certificate of limited partnership
Unanimous written consent of all partners (limited and general)
Withdrawal of general partner (unless certificate establishes that other general partners will continue operation of business)
Court action
A limited partnership is dissolved through expiration of a term established in the certificate of limited partnership, completion of the objective established in the certificate of limited partnership, the unanimous written consent of all limited and general partners, the withdrawal of a general partner (unless the certificate of limited partnership establishes that other general partners will continue operation of the business,) and court action.

14. Limited Liability Company (LLC)
Similar to limited partnership, since each member has limited liability (dependent on investment he/she makes)
Tax advantages similar to partnership (“single taxation”)
Created based on agreement between members
Each member can participate in management
A limited liability company, or “LLC,” is similar to a limited partnership, since each member has limited liability (depending on the investment the member makes.) A LLC enjoys “single taxation” only, an advantage similar to a partnership. The LLC is created through an agreement between members. Each LLC member can participate in management.